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Recovery Delayed: September 11's Impact (Dec. 2001)
December 7, 2001 |Estimated reading time: 14 minutes
Recovery Delayed: September 11s Impact by Walt Custer December 1, 2001
With the first post-September 11 data now available, we can begin to gauge the impact of the terrorist attacks and subsequent war efforts on business conditions in the electronics industry. At the very least any attempts at an autumn 2001 recovery have certainly been set back. Layoffs continue, unemployment has surged and not surprisingly consumer confidence (Chart 1) is at its lowest level since 1994. The industrial sector has also cut back as the U.S. Purchasing Managers Index (Chart 2) reached a major low point in October. A decline in new orders was key to the sharp drop in this buying index.
What about the electronics sector? The October electronic equipment data wont be available until early December but the September numbers sure are sobering. Chart 3 shows equipment orders by sector. The "recovery" that communications equipment had shown in July and August turned into a major September plunge. Computers, already on a downward trend, continued their slide. Based upon this data a recovery does not look imminent.
However we do appear to be making progress in reducing inventories (Chart 4). With stock levels returning to reasonable levels we can expect that when electronic equipment demand does pick up that we will see these new orders immediately. We wont have to "flush" inventories first.
At present however inventories levels compared to current sales and orders are far too high. Per Chart 5 the inventory to order ratio (red line) rose sharply in September not because inventories increased but because orders plummeted. Hopefully the September order plunge was a short-term reaction to September 11 and well see some recovery in coming months.
Looking forward, cell phone shipments will drop this year from 413 million units in 2001 to some lesser number. Each forecaster seems to have its own opinion but I have used Samsungs recent projections in Chart 6. Whatever the 2001 and 2002 values the shift to "low cost" Asian and Eastern Europe production and the increasing importance of the CEMs has certainly changed the global mobile phone manufacturing marketplace.
What will the future bring? So much depends on the world situation. Ongoing instability gives reason for continued delays in our much-sought "recovery." Dataquest recently provided a semiconductor forecast (Chart 7) that is instructive. It projects minor growth in 2002 followed by a 30% increase in 2003. At this point I cannot argue with this scenario. I just hope that peace and the end to terrorist attacks come quickly.
General Business Conditions
Demand for electronics manufacturing services may grow in Japan amid a global slump in the information technology sector, said Ash Bhardwaj, president of Flextronics International Asia-Pacific. Flextronics extensive manufacturing base, especially in low-cost regions, will be "very attractive to Japanese companies as they embrace the outsourcing model in order to stay competitive," Bhardwaj said. But Bhardwaj seemed in no rush to purchase plants in Japan. Japanese electronics makers are still wary of outsourcing production, Bhardwaj said, noting that he hopes to see that change in the future.
Dell Computer will increase procurement in Taiwan by 15-20% in 2002. In order to lower manufacturing costs in line with falling prices in the PC industry, Dell will increase its contract manufacturing orders. Dell has purchased US$5.5 billion thus far in Taiwan. With the expected procurement increases, Dells purchases may reach US$6.3 billion to US$6.6 billion next year in Taiwan.
The U.S. based trade organization IPC (Association Connecting Electronics Industries) signed a 3-year Cooperative Research and Development Agreement with the Naval Surface Warfare Center, Crane, IN. The goal of the program is to aid PCB manufacturing by researching state-of-the-art advances in design, development and manufacturing processes. NSWC Crane has a complete PCB manufacturing facility, comprehensive failure analysis lab, an environmental test and evaluation lab and extensive computer modeling capabilities to support this goal.
As the electronics industry prepares for the volume production of lead-free PCB assembly, leading companies from the EMS industry announced the formation of the "EMS Forum on Lead-Free PCB Assembly" (EMSF). The forum comprises Celestica, Flextronics, Jabil, Sanmina, SCI, and Solectron. The mission of the EMSF is to discuss and address the issues that will affect the EMS industry as a whole as the transition is made to lead-free PCB assembly.
Electronic Equipment
Computers
Dataquest said that unit personal computer shipments worldwide declined nearly 12% in the third quarter compared with the same period last year. According to the preliminary results, it said global PC shipments totaled 30.6 million units, down from 34.6 million units in last years third quarter. U.S. sales declined even more, with 10.9 million units shipped - an 18.7% drop from 13.4 million PCs in the third quarter of 2000. "In the third quarter of 2001, the PC market continued to suffer from the impact of PC saturation in developed markets. And the effects of the U.S. economic downturn came heavily to bear on all PC regions," Gartner Dataquest analyst Charles Smulders said. Dell extended its lead in both the U.S. and worldwide markets, capturing 13.8% of worldwide shipments (Chart 8) and a 25% of domestic shipments - double that of its nearest rival.
Mobile Communications
Samsung Electronics is set to manufacture mobile phones in China in partnership with local Chinese mobile manufacturers. Samsung said it has submitted an application to the Chinese government for a business license in a bid to build a CDMA-based mobile production factory in China. Samsung said it would invest about US$60 million in the factory and hold a 49% stake, with the three Chinese firms holding the remaining share.
Samsung Electronics said it expects 410 million cell phones to be shipped worldwide in 2002, up from 390 million units produced this year by the global mobile phone industry (Chart 6). This year will be the first in the industrys history of falling unit sales. Phone makers originally estimated shipments of between 500 and 550 million handsets this year, but the actual number will be nearer to 390 million, down from 410 million in 2000. Motorola, the worlds second-largest cellphone maker, said in early October that it expects global unit shipments of between 420 and 460 million.
Siemens is expanding production at its mobile phone plant in Shanghai. It is investing heavily at the works in Pudong, the area of Shanghai west of the Huangpu River designated by the Chinese government as one of the countrys Special Economic Zones (SEZs), which are designed to attract inward investment. The electronics group is planning for the Pudong plant, which saw two new DM9 million production lines recently go into operation, to become one of its two main centers for mobile phone production, along with its factory in Kamp-Lintfort in Germany.
Other
Tyco Electronics Power Systems closed its Mesquite, Texas manufacturing plant eliminating 700 jobs. When AT&T owned this facility, the Mesquite plant was the first American company to win Japans Deming Prize for manufacturing quality. Power Systems, which makes equipment that powers telephone networks and computers was purchased from Lucent Technologies in December for $2.5 billion. Tyco said the Mesquite plant wasnt a good fit with its other facilities.
M/A-Com Inc., a subunit of Tyco Electronics, received a 10-year, $1 billion contract from the Armys Communications and Electronics Command to provide land mobile radio technology, equipment and services for the militarys base radio system program. M/A-Com said it also received a five-year, $10 million contract from the Space and Naval Warfare Systems Center to support wireless interior communications programs for the Hydra land mobile radio systems.
PCB Fabrication
Aspocomp is cutting about 210 jobs at its Evreux, France plant by the end of this year to adapt to weak demand. The Evreux PCB plant (a former Philips facility) had a total workforce of 545 at the end of September.
Glen Brislan has joined Canadian PCB maker Coretec as Chief Operating Officer. He will oversee all of Coretecs manufacturing operations including Littleton Colorado, Biggleswade England, and Toronto. Brislan will report to Paul Langston, CEO and President. Prior to joining Coretec, Mr. Brislan was VP, Operations for Viasystems Canada.
DENSO Corporation said it has developed a new high quality multi-layered PCB - PALUP (Patterned Prepreg Lay Up Process) board that can be formed at low cost by pressing together all constituting recyclable substrates. "DENSO is the first company in the world to adopt thermoplastic resin for substrates and succeed in forming a multilayer PCB (PALUP board) to satisfy all the necessary requirements: ease in forming a PCB from a greater number of substrates, at a lower cost and at a higher quality," said Mineo Hanai, DENSO Corporation director
Flextronics has formed alliance with Japanese PCB maker Kyoden Co.
Sheldahl raised $7 million in subordinated debt from Morgenthaler Partners, Ampersand.and Molex, existing investors in the company. Sheldahl also announced that it would not sell its technical materials business, based in Northfield, MN.
Sumitomo Bakelite has begun to switch production of medical tools from Japan to China to raise its price competitiveness. The Akita plant will keep making printed circuit boards used for PCs and other devices, and medical tools R&D will continue to be done in Japan.
Materials
Advanced Glassfiber Yarns said that continued downturn in market conditions has necessitated further curtailment in production activity at its manufacturing plants in Aiken, South Carolina and Huntingdon, Pennsylvania. The Aiken Plant previously placed over 200 employees on furlough. These additional production curtailments will result in further workforce reductions bringing the total number of employees on furlough to 360. The Huntingdon, Pennsylvania and South Hill, Virginia plants have previously made curtailments in production activity. Further adjustments are being made and the number of employees that will be on furlough will increase to about 150. In addition to the furlough, a company-wide reduction in the number of salaried positions will be implemented.
Isola Laminate Systems will permanently close its La Crosse, WI manufacturing facility March 31, 2002 and shutdown its Hoosick Falls, NY facility for an indefinite time period. Production of Isolas specialty materials will be transitioned to other Isola manufacturing sites over the next several months.
Japanese trading house Marubeni and semiconductor start-up North formed a JV in China to make cellular phone components. The JV will employ Norths Neo Manhattan bump-formation technology to produce intralayer interconnect material for PWBs. The JV will start operation in China in July 2002 with an output capacity of 20,000 square meters of the material a month - enough for one million mobile phones.
Park Electrochemical announced that Dielektra GmbH, Parks advanced electronic materials business located in Cologne, Germany, is closing down its conventional lamination line, and will focus its efforts and capabilities on its Datlam™ automated continuous lamination and paneling manufacturing technology.
PCB Assembly
Celestica will transfer part of its mobile phones production from Britain to Kladno, Central Bohemia. It will place the PCB assembly equipment in a plant that it took over from Sagem. At full operation the plant with 1,500 employees can assemble up to 16,000 mobile phones daily, or 3.5 million phones per year.
C-MAC Industries completed its transaction with Nortel Networks to supply systems integration, configuration and testing of DMS circuit-switching products, as well as related supply chain services. These operations are currently being performed in-house at Nortel Networks facilities in Research Triangle Park, NC and Monkstown, Northern Ireland, and will be transferred to C-MACs operations in Creedmoor, NC and Carrickfergus, Northern Ireland.
EG.com Bhd is proposing to acquire the entire equity of SMT Technologies Sdn Bhd, a Malaysian CEM using surface mount technologies, for RM40mil. The purchase is to be satisfied by the issue of 22.22 million new shares in EG.COM at RM1.80 per share.
Elcoteq Network of Finland will build a new facility in Nokia-operated Xingwang Industrial Park in Chinas Beijing Economic-Technological Development Area. The new plant will employ 1,200 and make electronic assemblies for Nokia and others.
Elcoteq Network established a major technology center in Sweden to offer engineering services to LM Ericsson.
EFTC announced the expansion and relocation of its Northeast Operations to a new 75,000 SF facility in Lawrence, MA. The manufacturing plant was previously located in Wilmington, MA.
Flextronics is consolidating its operations into eight manufacturing hubs. The bulk of its manufacturing activity by June 2002 will take place in low-cost areas - Brazil, Mexico, Hungary, Malaysia, Poland, Shanghai and southern China, and Texas.
Flextronics and California Polytechnic State University have jointly sponsored and developed an educational Web site that explores the manufacturing of electronic products at www.flextech101.com.
Swedish telecom operator sold its Orbiant Group services unit to Flextronics for 1.05 billion crowns ($99.09 million). Orbiant comprises the Neterna, Telia Service, Telia Systems, Evega, Relacom and Wireless Network Management companies, dealing with design, installation, operation, maintenance and management of fixed and mobile telephone networks. Orbiants sales last year were $1.7 billion.
Manufacturers Services Ltd. (MSL) formed a strategic alliance with Venture Technologies to enhance product design and engineering services MSL offers its customers.
MSL will close its Salt Lake City, Utah plant during the first quarter of next year.
Pemstar will purchase MTS Systems 40,000 SF Chaska, Minnesota factory. The purchase gives Pemstar a base for engineering and production operations in the Twin Cities area, where it already has customers such as 3M, Honeywell and others, said CFO Bill Kullback.
Philips Electronics is converting its PCB assembly division into a contract manufacturing company. Philips Contract Manufacturing Services (PCMS) is focused primarily midsize European OEMs that want to use Philips design, engineering, manufacturing, and logistics services, said Michel Charriau, CEO of PCMS. "OEMs are looking for turnkey solutions and we want to serve third-party interests," PCMS, which has 13 PCBA facilities throughout the Americas, Asia, and Europe, had $1.5 billion in sales in 2000.
Sanmina completed its acquisition of certain assets of E-M-Solutions, a privately held international electronic enclosure manufacturer. The transaction includes certain manufacturing operations in the United States, as well as the stock of E-M-Solutions subsidiaries incorporated in Mexico and Northern Ireland.
SCI Systems will further reduce capacity due to continued market slowdown, especially in the telecommunications industry. A. Eugene Sapp, chairman and CEO, said in mid-October, "We plan to close several additional plants, representing about 10% of capacity and primarily in high cost locations, in order to further "right-size" our operations and cost structure for current market conditions and future opportunities."
SMTEK completed purchase of certain assets of Century Electronics, an EMS company, for about $3.1 million. SMTEK will now operate facilities under the SMTEK name in New England, Silicon Valley and Thailand and expand its presence in Florida. Greg Horton, president and CEO, said, "SMTEK has now expanded into Silicon Valley and New England, two critical electronics regions. Additionally, our expansion into Thailand allows us to offer a low-cost production alternative for our customers, as well as an Asian purchasing center with expected cost savings."
Solectron will provide Sierra Wireless, Vancouver, British Columbia, with design support, prototype, new product introduction and volume manufacturing services for data and telecommunications products. Sierra Wireless manufactures wireless PC cards for portable computers, wireless adapters for PDAs, OEM modules for embedded applications and rugged vehicle-mounted wireless systems.
Solectron acquired Iphotonics including its advanced optical subsystem manufacturing, fiber handling, splicing, packaging, termination and connectorization services, as well as significant optical engineering and design expertise. In addition, Solectron acquired Iphotonics design, prototyping and manufacturing facility in Glen Burnie, MD, and an engineering and development center in Fremont, CA Solectron will integrate Iphotonics into its existing optical technology unit.
Arris, which makes optical radio frequency transmission equipment for broadband communication systems, will shut two operations in Juarez, Mexico and two more sites in El Paso, Texas when it moves its in-house manufacturing programs to Solectron.
Solectron and NEC announced an agreement under which NEC would transfer the manufacturing business of its Ibaraki, Japan facility (NEC Ibaraki, Ltd.) to Solectron, and Solectron would provide manufacturing services for server, workstation and storage products.
Solectron completed its acquisition of Stream International a global Customer Relationship Management outsourcing and support services provider. Through the transaction, Solectron becomes one of the worlds 10 largest providers of CRM outsourcing services. Stream operates 22 contact centers in North America, Asia and Europe, with revenues of $323 million in CY2000.
Semiconductors
Intel designed a new chip package that it claims helps build thinner, faster processors and would be cheaper than todays methods. The technique, bumpless build-up layer packaging, or BBUL, will debut in 2006 or 2007. Chips based on it would be thinner than a dime.
North American orders for semiconductor equipment (used to produce and test the chips that run computers and other electronics) dropped 11% from August to $644.3 million. Shipments of previously booked orders dropped 13% from August to $993.4 million, making it the 11th consecutive monthly decline. "As expected, recent global events have exacerbated the already poor forward visibility for high-tech industries as consumer confidence remains weak and businesses hold off on spending," said Stanley Myers, president and CEO of SEMI.
Displays
Worldwide revenues for microdisplay components such as liquid-crystal-on-silicon (LCOS) devices and other display technologies are expected to reach $1.9 billion in 2007 from $668 million this year, according to Standard Resources. "Unit shipments of microdisplays are dominated by near-eye applications, while market value arises mostly from projection applications," noted analyst Kimberly Allen, director of technology and strategic research at Stanford Resources. "This situation is expected to continue, with projection applications accounting for 74% of the microdisplay market value by 2007, and near-eye applications accounting for 72% of the units." Counting all types of microdisplay components - aimed at everything from camera viewfinders to projection TVs - the number of units being shipped is expected to exceed 44 million devices in 2007.
Coming Events
Custer Consulting Group will have a booth at APEX 2002 January 24-28 in San Diego, CA and IPC Printed Circuits Expo, March 24-28 in Long Beach, CA. Hope to see you there.
If you are interested in keeping up with the industry news e-mail us for a free 30-day trial of our daily news service.
_______________ Walt Custer Custer Consulting Group Phone: 707 785-1777 FAX: 707 785-1988http://www.custerconsulting.com/
E-mail: wcuster@mindspring.com
This article was originally published in CircuiTree magazine and is reprinted here with permission.